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Old Mutual gains as analysts agree breakup would make sense

Old Mutual Plc, the U.K.-based financial services firm that is Africa’s largest insurer, climbed on speculation that it is considering a breakup of businesses as part of a strategic review.

The company rose as much as 12 percent in London, its biggest intraday gain since December 2011, and was 6 percent higher at 191.30 pence as of 10:03 a.m., making it the top performer in the STOXX Europe 600 Financials. Nedbank Group Ltd., the South African lender controlled by Old Mutual that may be involved in any split, dropped as much as 2.5 percent.

Analysts said a breakup would make sense because European capital requirements for insurers, known as Solvency II, force the company to discount some of its operations. They disagreed, however, on whether the company should stick with Nedbank.

“The group continuously trades at discount to its sum-of-the-parts, there are limited synergies between the businesses and the costs of being based in London now outweighs the benefits,” said Risto Ketola of SBG Securities in Johannesburg. Ketola expects Old Mutual to exit Nedbank and sell U.S. operations not core to the business. Latin American and Chinese units are also possible disposals, he said.

Sky News reported on Saturday that Old Mutual plans to split into standalone businesses. The company said in a statement on Sunday that no decision has been made and it will provide an update when it releases earnings on March 11. It said on Monday that it’s collaborating with Nedbank on the strategic review.

Old Mutual, Africa’s biggest insurer, was founded in South Africa in 1845 and moved its headquarters to London in 1999. It has operations in the U.K., the U.S., Latin America, China and across Africa and its businesses span insurance, asset management, wealth management and banking. Chief Executive Officer Bruce Hemphill started a strategic review after taking over from Julian Roberts in November.

Old Mutual, which generates 68 percent of its earnings in rand, stands at a significant disadvantage to peers under Solvency II, analysts at Sanford C. Bernstein led by Edward Houghton said in a note to investors. “Exchange controls mean that it is not permitted to recognize surplus South African capital in its group solvency position.”

The rand has slumped 17 percent against the pound in the past 12 months, eroding earnings from South Africa. While the company sold part of its U.S. asset management business in an initial public offering, it has made few changes at its Chinese and Latin American units in the past three years.

While Ketola expected Old Mutual would like to exit its stake in Nedbank, Sanford C. Bernstein analysts said it’s unlikely. “We think the board is more likely to retain its stake in Nedbank, and to seek to bring the bank and insurance businesses more closely together,” Sanford C. Bernstein said.

Old Mutual holds more than 50 percent of Nedbank, South Africa’s fourth-largest lender by assets. It was about to sell its Nedbank stake to HSBC Holdings Plc in 2010, but after HSBC walked away without explanation, Nedbank reorganized its business and remained profitable, paying dividends to Old Mutual and helping the insurer expand in Africa.

“While Nedbank has 6.2 million retail customers, and Old Mutual South Africa, the life insurance entity, has 4.1 million customers, only 15 percent of the combined customer base has both bank and life insurance products,” Sanford C. Bernstein said.

If Old Mutual does decide to sell down its stake in Nedbank, this will be the second South African bank with shares for sale after Barclays Plc said March 1 it will reduce it holdings in Barclays Africa Group Ltd. because increased regulation made it too costly to control the lender.

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